According to the IMF, solid growth and a sharp reduction in unemployment are largely due to supportive macroeconomic policies, a favourable external environment, and high utilisation of EU funds.

Output growth is projected to moderate slightly this year owing to the expected deceleration in the uptake of EU funds. Headline inflation is expected to remain low on account of low import prices and slowly reach the 3 percent target as food and energy prices recover and the labour market tightens, the report said.

The current account has been in record surplus while external debt - especially FX-denominated - and gross public debt have continued their downward path.

The IMF said Hungary is now less vulnerable to external shocks, though it gave warning that financing needs remain high and an abrupt sharp deterioration in global or emerging market risk perception could lead to capital outflows.

Accommodative fiscal and monetary policies have helped growth while also expanding the state’s role in the economy, shifting risks to the public sector, the report said. More needs to be done to further reduce vulnerabilities, especially given the fragile external environment, and to transition to growth driven by a vibrant private sector, it added.

In the IMF mission’s baseline scenario, current fiscal plans imply a structural fiscal deficit of 1.75 percent of GDP over the medium term and a moderate reduction in the public debt ratio to around 70 percent by 2021, leaving Hungary vulnerable to shocks.

Growth-friendly fiscal consolidation would help build buffers, while more ambitious structural reforms aimed at improving the business environment, enhancing competitiveness, and addressing labour market weaknesses would boost the economy’s growth potential, the IMF said.

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